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All Out of Lunch Money Charley Severs Axia College University of Phoenix COM/120 Professor Kirie Rose Pedersen April 22, 2007
All Out of Lunch 2 All Out Of Lunch Money With the constantly fluctuating gasoline prices, cost of groceries, insurance deductibles, medical insurance co-pays, and college tuition, the price of energy is taking a bite out of the real wage of the average wage earner. As we know the prices for gasoline seem to set new peaks every summer. The average cost for heating a home has gone up as well (Pringle, 2006). Congress is concerned that America is being taken advantage of to a vast degree. The largest single factor that affects energy costs (gasoline, heating oil, refined oil) is the market price per 50 gallon barrel (Pb) of crude oil. The predominate force that influences market price for crude oil is The Oil Producing Exporting Countries, or OPEC. OPEC is an illegal cartel that is guilty of price-fixing and anti-competitive practices. What choice do we have but hand over our lunch money to the playground bully? The Bully’s Childhood OPEC is not new to the world scene, nor are they without significant history descriptive of a playground bully. OPEC was created in 1960 when countries from the Middle East saw a need to stabilize the world market prices of crude oil. New Century Transportation Foundation’s map shows the countries currently forming OPEC, in figure one.
(Figure 1. The countries making up OPEC, New Century Transportation Foundation, 2005).
All Out of Lunch 3 OPEC has used oil as a weapon in the past. OPEC’s personality has been forged from the results of greed and war. Nicolas Sarkis notes regarding the United States support of Israel during the Six Day war of 1967, scorned the OPEC countries to such a degree that “Opec takes advantage of the situation after the June 1967 Arab-Israeli war, and of a supply shortage, to force the western companies to agree to end oil price discounting” (Sarkis, 2006, OPEC’s Influence). Remembering the oil embargo of 1973 leaves a bitter taste in the mouth of those who endured it, which resulted in long lines at the gas pumps. Sarkis explains further on the embargo resulting from the 1973 Arab-Israeli war, “Arab producers place an embargo on countries that they regard as pro-Israeli (the United States and the Netherlands)” (Sarkis, 2006, OPEC’s Influence). Additionally author Lauren Levy reiterates this point on the 1973 war by adding, “OPEC used oil to pressure the United States not to aid Israel’s war effort. Only two days into the war OPEC members (led by Iran and Saudi Arabia) demanded a 100 percent increase in posted prices” (Levy, 2007, OPEC). OPEC currently monopolizes approximately 42% (This figure is slightly volatile and so fluctuates often) of the world’s oil production and controls about two thirds of the world’s oil reserves. When OPEC speaks everyone in the oil and investment world listens. When OPEC announces a cut in production levels, the price of oil will begin to rise, this statement is not an ambiguous one, according to OPEC’s own website, in the “frequently asked questions” section, note OPEC’s own response to the question: “Does Opec control the oil market?” note the contradiction, OPEC responds, “No, … However, OPEC’s oil exports represent about 51 percent of the crude oil traded internationally. Therefore OPEC can have a strong influence on the oil market, especially if it decides to reduce or increase its level of production” (OPEC, 2007).
All Out of Lunch 4 In answer to the question “How does OPEC oil production affect oil prices?” OPEC responds again, “… any decisions to increase or reduce production may lower or raise the price of crude oil” (OPEC, 2007). Do the other non-Opec nations care? Why should they? They benefit unilaterally by the rise in oil prices, they ride the coat tails so to speak of OPEC. As stated, OPEC currently monopolizes approximately 42% of the world’s crude oil production, and about two-thirds of the world’s oil reserves. This large market share is what makes OPEC’s influence on the oil prices so successful. The United States Department of Energy (DOE) posted a graph on their web page in 2003 that shows OPEC’s contribution to the world’s supply of crude oil as follows, in figure two:
(Figure 2, OPEC share of world oil production, DOE, 2003) Why is OPEC considered a cartel when the word usually brings to mind illegal activities such as drug cartels and the mafia? OPEC is considered a cartel by most, because of the business model it uses. One online encyclopedia describes “Cartel” in descriptive terms, the Britannica Concise Encyclopedia defines “Cartel’ as an:
All Out of Lunch 5 Organization of a few independent producers for the purpose of improving the profitability of the firms involved (see oligopoly). This usually involves some restriction of output, control of price, and allocation of market shares. Members of a cartel generally maintain their separate identities and financial independence while engaging in cooperative policies. Cartels can either be domestic … or international (e.g., OPEC). Because cartels restrict competition and result in higher prices for consumers, they are outlawed in some countries. (Britannica Concise Encyclopedia, n.d., Cartel) A recap here is beneficial. OPEC already admits that it can have an influence on crude oil prices.Opec has also admited that it increases or decrease supply to adjust or stabilize prices.Opec is made up of “… a few independent producers for the purpose of improving the profitability of the firms involved …” as defined above, and so fits the model of a cartel. One accomplished Economist, Steven E.Plaut, is a Professor on the faculty of the graduate school of business administration at the University of Haifa. Additionally he obtained his Ph.D in Economics from Princeton University and astutely defends OPEC as a cartel. In his disertation some seven pages in length, he gives many reasons why OPEC should not [italics added] be considered a cartel. Plaut contradicts himself to a vast degree when he states, “At best,OPEC represents a group of producers who together have sufficient market power to set world petroleum prices much higher than they would have been set by competitve market forces”[ Italics added] (Plaut, 1981, OPEC is Not a Cartel). Not only does he describe OPEC as a cartel, when the definition above is applied, Plaut finds them guilty of anti-competive practices. Proffesor Plaut makes the point well and should be credited for enforcing the fact that OPEC is a cartel indeed. Congress vs. OPEC
All Out of Lunch 6 The United States Government has been keeping an eye on OPEC for quite some time and with good reason. As stated earlier Congress is concerned that OPEC is operating as a cartel, and guilty of price-fixing or anticompetive behavior. The then Govenor Bush while campaigning for presidency noted, “OPEC has gotten its supply act together, and it’s driving the price, like it did in the past (Bush, 2000, cited by Pringle, 2007, Big-mouth Bush told Clinton how to handle OPEC, paragraph 3).” Congress has passed several bills charging OPEC with anti-competitve behavior, price-fixing, and wants OPEC to be held accountable for their illegal practices. The Congressional Research Service report of May 31, 2000 notes: There is widespread concern in Congress over the rising cost of oil in the United States. Some members have pressed the President to pursue a more aggressive policy to try to reverse the decision by OPEC (1) and other major oil producing nations to limit production in order to drive up the price of oil.(Organization of Petroleum Exporting Countries (OPEC) and other oil producing nations: U. S. Aid, Arms Transfers and Trade Data:RS20501, 2000) Senator Patrick Leheahy remarks in his opening comments to Congress on April 26, 2006 reguarding one such congressional act, Leahy states: These provisions will allow the Justice Department to crack down on illegal price manipulation by oil cartels. I do not think anyone doubts that the price of a gallon of gas on Main Street in any of the communities we represent is affected by such conduct. Our bill will allow the Federal Government to take legal action against any foreign state, including members of OPEC, for price fixing and other anti-competitive activities. This is a tangible, meaningful step that we can take – today – that can help deter OPEC from
All Out of Lunch 7 withholding oil supplies. That would mean lower prices at the pump across America. (Leahy, 2006, Opening Remarks of Sen. Patrick Leahy Ranking Member, Judiciary Committee on “Oil and Gas Industry Antitrust Act of 2006” Executive Business Meeting) This is not an isolated case of a concerned member of congress, Senator Arlen Specter stated: While fighting for these energy policies, I have pressed for the U.S. to sue OPEC under antitrust laws. I have urged the current and former Administrations to take OPEC to the U.S. federal courts for conspiracy to limit oil production and raise prices. This cartel has manipulated the oil markets in violation of U.S. and international law and it should be pursued (Specter, 2005, Senator Specter Comments on Vote Regarding Oil Exploration in ANWR, Paragraph 7). As our energy costs continue to climb and gasoline sets new high prices every spring and summer, the playground bully gets richer and fatter. Any illegal cartel that meets and agrees to cut availability of its product to the world solely to increase its profits is guilty of a monopolizing or anticompetitive business practice and would not be allowed to exist here in the U.S. The facts are supported by the Government records as seen herein. OPEC’s history and its future intentions are very clear. They are not going anywhere and will continue to milk our pocketbooks and the world’s economy for some time. Obviously this will continue to happen to our children and our grand-children as they will be bullied by OPEC as well. Our only way to hold on to our “lunch money” in the future is to stop our addiction to oil. Like any addiction the withdrawal symptoms would be painful for a while but with positive future results. In closing, Senator Specter says it well. As he acknowledges the waiting bully, Specter states, “It is only through concerted efforts to reduce projected U.S. oil consumption and to utilize domestic energy resources that our nation will be able to become energy independent …[or] our
All Out of Lunch 8 dependence on OPEC will grow (Specter, 2005 Senator Specter Comments on Vote Regarding Oil Exploration in ANWR, Paragraph 7).
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References Cartel. (n.d.). Britannica Concise Encyclopedia. Retrieved April 05, 2007, from http://www.answers.com/topic/cartel Headlee, L., Ng, N., & Nowels, L. (2000). Organization of Petroleum Exporting Countries (OPEC) and Other Oil Producing Nations: U.S. Aid, Arms Transfers and Trade Data: RS20501.Congressional Research Service: Report; 5/31/2000, p1-7. Retrieved March 7, 2007, from EBSCOhost database. Leahy, P. (2006, April 27). Opening Remarks of Sen. Patrick Leahy Ranking Member, Judiciary Committee on “Oil and Gas Industry Antitrust Act of 2006” Executive Business Meeting April 27, 2006. Retrieved March 10, 2007, from http://leahy.senate.gov/press/200604/042706.html Levy, L. (2007). OPEC. Paragraph 5. Retrieved April 5, 2007 from, http://www.jewishvirtuallibrary.org/jsource/US-Israel/opec.html New Century Transportation Foundation. (2005, December 1). p4. Retrieved March 19, 2007 from http://www.newcenturytrans.org/issuebriefs.htm OPEC. (2007). Does OPEC control the oil market? paragraph 1. Retrieved March 20, 2007, from http://www.opec.org/library/FAQs/aboutOPEC/q13.htm OPEC. (2007). How does OPEC oil production affect oil prices? paragraph 3. Retrieved March 25, 2007, from http://www.opec.org/library/FAQs/aboutOPEC/q14.htm Plaut, S. (1981 November/December). Opec is not a cartel. Challenge 24(5), p18.Retrieved March 8, 2007, from EBSCOhost database.
All Out of Lunch 10 Pringle, E. (2006, April 27). Big-mouth Bush told Clinton how to handle OPEC. A Buzzflash Reader contribution, paragraphs 15, 16, 3. Retrieved March 25, 2007, from http://www.buzzflash.com/contributors/06/04/con06165.html Sarkis, N. (2006, May).Opec’s Influence. Le Monde Diplomatique. Paragraphs 3, 5 Retrieved April 5, 2007, from http://mondediplo.com/2006/05/07timeline Specter, A. (2005, March 16). Senator Specter comments on vote regarding oil exploration in ANWR. paragraph 7. Retrieved March 15, 2007 from http://Specter.Senate.gov/index.cfm?FuseAction=Pressreleases.Detail&PressRelease_id= 705&Month=3&year=2005 The United States Department of Energy. (2003). Crude oil production: OPEC, the Persian Gulf, and the United States. p1. Retrieved March 24, 2007 from http://www1.eere.energy.gov/vehiclesandfuels/facts/2003.htm
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